Denying Claims
Gerald from the Not-So-Closed Cafeteria is having problems with the American health care system. Specifically, his insurance company is denying him dental coverage because it is a pre-existing condition. Welcome, Gerald, to the reality of American health care! Maybe now he will take the claims in Sicko seriously where employees of insurance companies explain how they are rewarded based on how many claims they can get away with denying. He seems to be well on the way to an awakening, noting that the insurance companies are “incompetent and inefficient”.
But not quite. In the very next breath, he links to an essay by Ramesh Ponnuru defending the treatment of health care in terms of actuarial rather than social insurance. In Ponnuru’s view, in line with the Republican consensus, the problem is over-consumption. Because you do not bear enough of the cost yourself, you will not ration health care appropriately, a problem Ponnuru feels is exacerbated by employer-based insurance. So if you give people tax cuts, they can pay for their own health care, which will be cheaper. Problem solved.
But this is a fundamentally flawed mode of reasoning. For a start, the assumption that consuming too much health care is the root of the problem seems more than a little bizarre with 47 million uninsured and the fact that health care is rationed extensively by cost in the US (survey evidence suggests that more than half of sick Americans stayed away from the doctor on health grounds over the past couple of years). It basically misses the core market failure in the health care domain.
Let’s talk about pre-existing conditions for a minute. We know that three Republican presidential nominees– John McCain, Rudy Giuliani, and Fred Thompson– are cancer survivors. And all three support purely private sector solutions to the health care crisis. But, as Ricardo Alonso-Zaldivar points out, under the plans they have put forward, cancer survivors like themselves could not be sure of getting treatment, especially if they were not covered by a government- or employment-based plan. Indeed, experts claim that cancer survivors are very likely to be denied insurance, unless the state has very strong consumer protection laws. In a survey of 22 insurance companies concerning whether they would cover a hypothetical breast cancer survivor five years after treatment, 11 said they would deny coverage outright, 1 said they would double the premium, 1 said it would exclude any further cancer treatment, and 3 did not respond. Only 6 said they would provide insurance at normal premia.
Here’s the rub: you cannot simply move to a system whereby people purchase their own insurance and expect the market to work. This is a clear case of market failure (adverse selection), as it is in the interest of the insurance companies to deny claims and coverage. Remember, insurance companies make money by screening people and weeding out the greatest risks. Americans’ health care choices remain at the whim of faceless insurance company bureaucrats. The insurance companies spend $50 billion a year doing this. Just look at the comparisons: Medicare devotes about 2 percent of its resources to overhead, compared with about 20 percent in the private insurance sector.
If you want to go the private route instead of single payer, then you must be able to tell insurers who to cover and how much to charge them– which goes against the free market ideology. Ultimately, the only solution is a form of social insurance, underpinned by a large risk pool whereby the young and the healthy subsidize the old and the ill, on the understanding that they themselves will be taken care of in their time of need. It’s efficient, as risk is spread among a large group. It’s also equitable and accords well with the Catholic principle of solidarity, of a community that looks after its own. The Republican solution instead focuses on the actuarial principle: you pay based on your own individual risk (much like car insurance). This relies on an individualist anthropology, and views individuals as personally responsible for their lot in life (no wonder it’s so popular among those most influenced by Calvinism).
The best form of social insurance is a single payer model, with one large risk pool, and one insurer (see here for arguments in favor). But there are other ways. For example, Clinton’s approach would combine an individual mandate (a requirement to purchase insurance) with a ban on insurance companies discriminating based on condition– they will be forced to charge based on average member of the risk pool. And how do you put together the risk pool in such a model? Clinton’s idea is to create a purchasing pool maintained by the government, so that people can select plans much as those in current risk pools do today. And if you are still too poor after all of this, you would qualify for financial assistance. There is another nice feature of the Clinton plan: one of the options available to people will be a government-run plan, using the basic Medicare model. So people will be able to choose between the private and public sector– and may the best man win!
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I don’t really care which party has the better idea. Something along the lines of Romney’s Massachusetts plan might work. I’d like to stay with the same plan and doctor if I stay in the same area. It’s nuts to have to switch health care plans with jobs and go through the entire ordeal of signing up, getting diagnosed etc. again, with the “bonus” of possibly being denied coverage. It’s not the right way of doing things. I’m not so partisan as to oppose a plan because it’s not a Republican one. It is obvious that a drastic change is necessary, I just don’t think that Euro-style health care is necessarily the only alternative.
One doesn’t have to be gung-ho about our present system to reject Michael Moore’s infomercial for socialism.
The main problem with third-party payment is not that it leads to overconsumption but that it leads to price insensitivity. Suppose that people purchased food insurance – they pay a certain premium each month, in exchange for which the insurance company pays all their food bills. Under such a system people would probably eat a little more than they do now, but they wouldn’t start eating six full meals a day instead of three. The main problem with such a system is not that people would eat more, but that they would cease to care about the cost of what they ate. There would be no incentive for people to hunt for bargains, buy off brand items instead of the more expensive name brands, or engage in other sorts of cost cutting behavior. And if everyone, or virtually everyone, stopped doing this, stores would cease to have any incentive to keep prices low, since low prices would no longer be an effective means of attracting customers.
Gerald– I agree with you. Romney’s Mass plan was not a bad plan, but of course he disavowed it. I believe that European-style single payer systems can be both more efficient and equitable, but I am also open to alternatives. The nice thing about Clinton’s plan is that if you like your present insurance, you can keep it, but if you don’t, you won’t get taken for a ride in the unregulated marketplace.
By the way, I would note, since the subject of this post involves dental insurance, that Canada’s government health care system, like many universal health care systems, does not cover dental.
I’m not sure that “insurance” is the right word for what health care has become.
My understanding of insurance: Each of us is unlikely to face a particular catastrophic loss. The odds are low, but the consequences are dire. So we pay more than our fair share on a risk-adjusted basis into a fund, and that fund then has the resources to cover catastrophic losses for its members. In buying insurance we bet against the house and hope to lose, but it is worth it in human terms because we are protected at least financially from catastrophic loss.
The way health plans are run is entirely different. It is simply a system of consumption, with insurance thrown on top for major events.
That doesn’t say what is right or wrong morally, what is good or bad policy, etc. But in my view we don’t even have a good language of what we are doing when we call our subscription service for health care “insurance”.
That would be the definition of catastrophic insurance. I used to come at it from that angle too. The only real definitional difference is between insurance and assurance. The former is an indefinite risk, and the latter is a definite risk. The latter isn’t really used anymore. The dictionary definition of insurance is:
coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril
That said, a number of companies will say they offer medical and dental benefits.
Regardless, the risks of moral hazard in regards to health care are often over stated. Even electric meters have limited marginal utility in reducing usuage and that is a pure removal of moral hazard. Landlords that cover electric can testify to that.
“Americans’ health care choices remain at the whim of faceless insurance company bureaucrats”
And it would be better at the whim of faceless government bureaucrats?
I still don’t see how requiring people to buy insurance when they supposedly can’t afford to buy it helps them.
But private health care plans as presently constituted aren’t an indemnification against a loss. They are a subscription to a service, which is a fundamentally different kind of thing. A key characteristic of insurance per se is that you pay more into the pool than you are actuarily expected to consume, and in return your losses are covered if the bad thing unexpectedly happens. There isn’t anything unexpected about a visit to the HMO.
Whether a universal health care plan is a good idea or not, one thing it is not is insurance, since there are customers in it who pay in less than they are expected, on average, to consume.
The triggering event is not unexpected in a whole life policy either. It is just a matter of when. The private health plans do indemnify. They pay a benefit when the contingent event occurs.
The “bad thing” in a whole (or term for that matter) life policy is dying unexpectedly young.
I’m not sure this digression is particularly helpful to MM’s discussion, and a threadjack wasn’t what I intended. But I think the terminology and concepts are broken, and in order to have the conversation that is part of what needs to be fixed. And a key concept which is obscured in current terminology is whether a particular customer is or is not paying in as much or more than what he expects actuarily to consume. There isn’t anything wrong with the government or some other entity paying the premiums for him, and it may be morally desirable to have the government pay premiums for people who are economically less well off, while those who can afford it pay – as an actuarial matter – their own way. But lets call a duck a duck, and not craft the discussion and the system in such a way as to obscure reality.
The best form of social insurance is a single payer model
Riiiiiiiiiiiiiight…
Health insurance is a bet. In order to get the best “odds” on the bet, you need to purchase it before you need it. If you develop cancer, and you go looking for insurance to cover it, the price will be much higher based on the risk to the one insuring you. Doing it the other way is a lot like placing your bet on the roulette table after the wheel has stopped.
If you don’t have health insurance, and you have a catastrophic illness, you may lose your house. If you house burns down, and you don’t have fire insurance, you lose your house too. People generally have fire insurance because it’s required of their bank because the bank owns the house, but people take chances every day because they consider themselves young and healthy and don’t think they need it. Then they get an accident or illness, and they want the government to bail them out because they chose not to buy the insurance.
Sure, some people can’t afford to buy insurance and put food on the table. Those people are generally covered by medicaid (which is a nightmare in itself).
Maybe an option is to make every dollar you pay for your own health insurance tax free (much like a federal flex spending account). The government has a history of rewarding people with tax breaks when they behave in a responsible manner.
There would be no incentive for people to hunt for bargains
I fear having to wait for a “sale” to get needed medical attention far more than any worry about social insurance.